Impinj's radio-tag empire faces new threat

Impinj's RFID tags can transfer data wirelessly even while submerged in water.

Tiny silicon chips used to identify and track goods from a distance are becoming ubiquitous in everything from consumer products like jeans and DVDs to medicines and military supplies. For more than a year, Seattle-based Impinj has quietly reigned over the market.

Impinj has been the world's only producer of the latest generation of chips that retailers and others are using for managing supply chains.

The chips power radio frequency identification (RFID) tags, which store data and transfer it wirelessly whenever they come close to a reader device. A handheld reader, for example, can scan a pallet of goods in seconds, retrieving details about its contents.

The technology is quickly taking off with retailers like Wal-Mart and Target, which mandate their vendors use them. The pharmaceutical industry is embracing the tags for labeling prescription drugs to thwart counterfeiting, and the U.S. Department of Defense is using them for tracking materials shipped around the world.

That demand has helped Impinj, which designs RFID chips as small as a grain of sand, pull ahead of the pack.

When the industry moved from the first generation of RFID tags to the so-called Gen 2 tags, Impinj helped write the standards. Then it moved quickly to put the first chips on the market. Customers have ordered a billion so far.

But now the upstart Impinj is getting some competition from previously slumbering giants. The year ahead could determine whether a promising local startup can withstand pressure from massive rivals and keep its finger on the pulse of a fast-changing technology market.

Last month, Texas Instruments debuted its own next-generation RFID chip. Until then, it had to buy the chips from Impinj, which had 100 percent market share. Impinj has most of its chips produced by Taiwan Semiconductor, one of its investors.

Semiconductor giant STMicroelectronics, based in Geneva, has also started producing new RFID chips, and Philips Semiconductors is expected to enter the market.

Impinj Chief Executive Officer William Colleran said he has been expecting competitors for months.

"We essentially wrote the standard," he said. "We have more than a year's advantage."

To push its own technology forward, today Impinj is introducing two new RFID products designed for specialized applications. One has enhanced security for anti-counterfeiting, and the other has 64 bits of rewritable memory for storing more data than current chips.

Impinj has a better idea of what customers want than its rivals because it has been in the market longer, Colleran said.

"They're really in tune with what's going on in the market," said Drew Nathanson, who directs RFID market research at Venture Development. But "these other guys have so much clout, they're going to come in and erode share."

Applications for the new chips include putting RFID tags on airline bags for routing and inspection, and tagging airline equipment with maintenance data.

As promising as those applications could turn out, there's still debate about which radio frequency works best. With its new chips, Impinj made a bet on ultra high frequency (UHF), which can be read from greater distances. But the pharmaceutical industry seems to be leaning toward high frequency (HF) chips, said Nathanson.

So far, when it comes to reading data on individual items, UHF hasn't matched the speed and accuracy of HF, he said.

Price has long been a factor limiting more widespread adoption of RFID. Early RFID technology watchers once talked about prices coming down to 5 cents per tag. While an Israeli company has managed to do that for large volume orders, tag prices are averaging 25 cents each this year, said Nathanson.

He predicts by 2010 the price will be half of that, as users push RFID makers to reduce cost. The chip contributes about half the cost of the tag, which also includes an antenna.

But Colleran argues that companies losing money on counterfeiting will pay a little extra to prevent it.

"Let's say you're paying a company in China to make a million pairs of tennis shoes," he said. "Nothing prevents them from making another set indistinguishable from the real thing."

An RFID tag can be used to authenticate the product. "If you're selling a $100 pair of Nikes, it's worth 20 cents to you," he said.

As RFID tags move from tracking pallets to individual products, privacy concerns also emerge. Privacy advocates have opposed RFID in consumer items because each chip has a unique identification number that could be read surreptitiously.

The new standard that Impinj helped write includes a way to "kill" an RFID tag permanently at the point of sale. But retailers are not always informing customers a tag is present.

Impinj isn't involved in the public debate over RFID, said Colleran, but its business could be hurt if such fears slow adoption.

Impinj has raised $75 million in funding and is cash-flow positive, although not yet profitable, said Evan Fein, vice president of finance and administration. Sales have been growing several hundred percent per year, he added.

Impinj makes money by selling chips and readers, and also by licensing its intellectual property.

The company is hiring more than 50 people this year — adding to its existing 120 employees — and has expanded into a new office in Fremont.

Fein said an initial public offering is still possible in the first half of 2007 "if things line up." Analyst Nathanson said it's a little hard to predict Impinj's future.

"The way they're coming back and attacking these new product introductions [is a good sign]," he said. But with other large companies now stepping into the domain Impinj has ruled, "it will be interesting to watch."